BackCreditors to take control of Electrosteel Steels under new rule
Kolkata-based firm has outstanding debt of more than Rs9,500 crore
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Mumbai: Banks will take control of Electrosteel Steels Ltd, a company that owes its lenders ₹ 9,500 crore—the first such takeover under new rules that empower creditors to do so.
The decision comes less than two months after the Reserve Bank of India (RBI) introduced its strategic debt restructuring (SDR) rule, and suggests that banks are eager to try and find a resolution to bad loans, if given the means to do so.
Stressed assets, which include bad loans and restructured assets, across Indian banks rose to 11.1% of total advances in March from 10.7% in September, RBI said in its financial stability report. Companies in businesses such as power and metals continue to struggle.
RBI, which has consistently spoken of the need for banks to be proactive and aggressive when it comes to tackling defaulters, has introduced a raft of new rules to ensure early recognition and recovery of bad loans. The toughest of these are the SDR rules, which allow banks to take majority control of a company under certain conditions.
It’s these rules that have been invoked in the case of Electrosteel Steels—a company which is promoted by the Kolkata-based Kejriwal family.
“...lenders of the company in its Joint Lenders Forum (JLF) held on 27 July 2015 have approved “in principle" the decision for invocation of Strategic Debt Restructuring (SDR) pursuant to RBI Circular dated 8 June 2015," the steel maker said in a notice to stock exchanges on Monday evening.
The decision to invoke SDR rules was taken to speed up the process of recovery of dues from a company which has been troubled for at least two years.
Electrosteel Steels was accepted in the corporate debt restructuring (CDR) cell for a recast of debt over ₹ 6,100 crore in December 2013. However, the company exited the cell after failing to implement the CDR package this year.
On 11 June, Electrosteel Steels had informed the exchanges that it had received term sheets for investment in the company from Tata group as well as from a financial investor based in Singapore.
Some foreign steel firms are also interested in buying a majority stake in the company, a banker who is part of the JLF overseeing the account said. This person declined to name the companies.
Banks will now oversee this process.
“We just felt that the sale would be quicker if bankers took charge. We aim to close the stake sale by 30 September," added this person, who asked not to be identified.
The lenders won’t have it easy.
They will have to try and recover their money even as steel companies continue to face pressure from weak domestic demand and cheap imports.
“It would be prudent for lenders and the new management to sit down and first discuss the best way to bring down debt to sustainable levels and then ensure that steel production resumes at full capacity," said Nirmal Gangwal, founder and managing director, Brescon Corporate Advisors, a firm which works with companies to come up with sustainable debt restructuring plans.
Even so, the decision of lenders to take control of the company could be seen as a test case for the new distressed assets framework, said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp.
“This is definitely the beginning of stronger lender control in case of defaulting borrowers. In cases where the current management has agreed for a change, the onus for restoration of lost value in a defaulting firm falls on the lenders. The current case could prove to be a test case," Parekh said.
Soon after he took over as RBI governor in September 2013, Raghuram Rajan signalled his intentions. “My worry is twofold. If we sit on these restructured assets without closer monitoring and action, we will see further erosion in value. And that we need to combat. We need to figure out what we need to do… That will put these projects on firm footing where necessary or liquidate where necessary," he said in an October 2013 interview.
“Second is a related issue. Public confidence in banks and the perception about the legitimacy of things like recapitalizing banks has a lot to do with whether you think the money has gone in the right direction. If what happens is that we bail out promoters who have siphoned out the money or who have too little equity but retain full equity holding, so that when the project is back on stream, they get all the upside and the downside is borne by banks that did the restructuring."
Last year, the central bank had introduced the JLF mechanism for bankers to better communicate with each other when dealing with bad loans and arrive at corrective action plans in a timely and effective manner.
Under the central bank’s SDR scheme, bankers can convert their loans to shares and effectively gain a controlling stake in a company where the debt restructuring package has failed, supplant the management and sell the company to an eligible buyer.
That’s exactly what’s happening at Electrosteel.
At least 75% of creditors by value and 60% of creditors by number have to agree to such a strategic management change. Post the conversion, all lenders under the JLF must collectively hold 51% or more of the equity shares issued by the company, RBI said in its guidelines on 8 June, adding that the invocation of SDR will not be treated as restructuring for the purpose of asset classification and provisioning norms.
“We expect these changes to positively affect banks’ corporate loan asset quality. A key objective of these guidelines is to allow banks to acquire majority equity stakes in corporates that are unable to honor their debt commitments. Acquiring a majority stake would make it easier for the banks to install new company management," said Moody’s Investors Service in a note on 15 June.
The rules may be particularly helpful in cases like Electrosteel where previous attempts at restructuring have failed.
According to data available with the CDR cell, as of 31 March 2015, the cell had approved restructuring for 530 loan accounts with debt over ₹ 4 trillion.
Of this, 165 cases with loans over ₹ 56,000 crore have exited due to failure in complying with terms of their respective CDR packages. Eighty cases with loans over ₹ 9,000 crore had exited the cell after successfully implementing their debt restructuring package and repaying their lenders.
The remaining cases are still in different stages of debt restructuring.
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